Global turbine leader Vestas has taken sole control of its offshore wind joint venture, a move that says a lot about Vestas' current standing in the sector — and even more about where wind power is headed.
The €700 million ($814 million) all-stock deal revealed last week will give Mitsubishi Heavy Industries (MHI) a 2.5 percent stake in Vestas, while MHI Vestas will be folded into Vestas effective immediately. The goal is for Vestas to lead in market share in the fast-growing global offshore wind turbine space by 2025, Vestas CEO Henrik Andersen said during a Thursday conference call with investors to discuss the transaction.
To seize that title from Siemens Gamesa, Vestas will launch a new technology platform for the next generation of the company's offshore wind turbines. “We won’t achieve market leadership with the current turbine," Andersen noted.
Vestas reports its third-quarter results later this week. That conference call will offer a glance at what its investors make of the move, plus perhaps coloring in some additional detail.
For those watching Vestas closely, bringing the offshore business entirely in-house was always a possibility given the obvious cost-savings potential. That said, MHI and Vestas previously maintained that the partnership model best suited them both. So why now?
Good books
Shashi Barla, Wood Mackenzie's principal analyst for the global wind supply chain, suggests the answer could be rooted in both the past and the future. MHI Vestas was created in April 2014, he pointed out. Vestas posted losses in 2011, 2012 and 2013, with its 2012 loss amounting to a staggering €963 million.
Offshore projects are not small endeavors. With a weakened balance sheet, Vestas was better placed to accelerate its offshore business with a partner. Cue MHI.
“Vestas has grown significantly in the last six years, and it now has a sizable balance sheet. [Vestas] can absorb these projects onto [its] own books,” Barla explained.
But in its Q2 2020 report, Vestas’ balance sheet was just shy of €15 billion. That strong financial position changes the calculus on its approach to offshore wind.
Now or never
As CEO Andersen said, the current turbines on MHI Vestas’ books aren’t going to get the company into a market leadership position by 2025. A fresh technology platform that could leapfrog the firm to a position alongside, or even ahead of, Siemens Gamesa and General Electric was necessary.
“[Vestas has] a strong pipeline to execute over the next four years, but beyond 2024, their market share is going to plummet if they don’t introduce the next generation,” says Barla.
Barla suggests that with the underwhelming returns from MHI Vestas, JV partner MHI may have decided it wasn’t prepared to assume half the risk associated with developing, testing and launching a new platform. Over the last five quarters, MHI Vestas' best result has been a profit of €22 million on revenue of €534 million.
“Mitsubishi will be concerned about pushing the investment button and spending another €400 million or €500 million on ramping up this supply chain,” added Barla.
Bringing the next offshore turbines in-house means maximizing savings with Vestas and boosting profitability in the process. As an investor with a 2.5 percent stake and a seat on the board, MHI can still benefit.
Expect the next-gen turbines to be big
So what should we expect to see from the next generation of turbines? Today, MHI Vestas turbines top out at 10 MW with rotor sizes of 164 meters, or up to 174 meters in a 9.5 MW iteration.
GE, meanwhile, shot into offshore contention with its Haliade-X platform with capacities of 12 and 13 MW and a 220-meter rotor size. Deliveries to the Dogger Bank project in the U.K could begin as early as 2023.
Offshore market leader Siemens Gamesa launched a 14 MW turbine with a 222-meter rotor in May this year. Its first order, for the 1.4 GW Sofia project in the U.K., will begin construction in 2024.
That’s the competition, and Vestas will need to match it. Barla expects Vestas’ next iteration of turbine to have a rotor size of around 240 meters and a capacity of between 14 and 16 MW. Anything short of that “would be terribly disappointing.”
Highlighting the importance of the offshore business
Siemens Gamesa and Vestas have been experiencing similar trials, but in opposing verticals: one at sea and one on land. The lengths to which both have gone to develop the three-legged revenue stool of onshore, offshore and services reflect the competitive nature of the wind power business.
While Siemens Gamesa has enjoyed market leadership in offshore, its onshore business has been suffering losses, which have ultimately led to an overhaul of the company management. New CEO Andreas Nauen was the head of the successful offshore business unit and has been moved into the top job in hopes that he can replicate that success.
Vestas has been breaking records in order-intake levels in concurrent quarters. Its share price rose all summer and hit an all-time record in October of DKK 1,166 ($184). Prior to 2020, it had never been above DKK 700. With a solid service revenue backlog as well, the lack of profitability at MHI Vestas, which reports outside of the listed Vestas Wind Systems A/S, was perhaps the only major missing part of the puzzle.
Growth projections for offshore wind have strengthened through the COVID-19 pandemic. This year the Global Wind Energy Council revised its 2030 cumulative capacity forecast to 234 GW, up 15 GW compared to the 2019 view. Trade body RenewableUK has tracked a 50 percent increase in the offshore wind project pipeline over the course of the last year.
Vestas is now better positioned to capture that growth as the master of its own offshore fortunes.